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Rediff.com  » Business » Sterling slides to 31-year low as Brexit shock deepens

Sterling slides to 31-year low as Brexit shock deepens

By Anirban Nag
June 27, 2016 18:57 IST
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Many economists have cut growth forecast for the United Kingdom.

Sterling fell to a 31-year low against the dollar on Monday as a sell-off stemming from Britain's decision to quit the European Union gathered pace, with the euro also pressured as Brexit clouded the future of the rest of the bloc.

Safe-haven currencies like the yen and the Swiss franc extended gains, much to the discomfort of the Japanese and Swiss central banks.

Sterling fell past $1.32 to $1.3192, its lowest since mid-1985, taking losses to 11.8 percent since last Thursday's vote.

The currency failed to get much of a lift from British finance minister George Osborne's assurances to markets that the economy was in good shape and that the government and Bank of England had further actions available to them if needed.

The pound saw its worst day in modern history on Friday, as investors betting on Britain remaining in the EU were reversed en masse.

On Monday, a slide in banking shares along with a lack of clarity on who runs the British government, a likely fresh move for Scottish secession and the response of the EU and its ability to contain calls by anti-EU parties across the continent all combined to make matters worse for sterling.

Given all the uncertainty, investors are pricing in a rate cut this year with some analysts expecting the Bank of England to consider quantitative easing to cushion the economy.

Gilt yields hit record lows, with the 10-year benchmark dropping below 1 percent.

"While we deem sterling as undervalued at these levels, the mixture of political uncertainty, flagging growth and concerns about the current account deficit should keep a lid on sterling during the weeks and months ahead and prevent any meaningful or long lasting recovery," said Petr Krpata, currency strategist at ING.

Many economists have cut growth forecast for the UK. Goldman saw Britain entering a mild recession within a year due to a deterioration in its terms of trade, scaled-back investment and tighter financial conditions because of exchange rate fluctuations, and weakness in risk assets.

SAFETY IN YEN

The safe-haven yen and the Swiss franc rose. The Swiss National Bank had intervened on Friday while investors are likely to test the Bank of Japan's resolve in coming weeks.

The greenback was 0.6 percent weaker at 101.56 yen after shedding 1.8 percent last week. The dollar hit 99 yen on Friday, its lowest since November 2013.

"The yen is a safe haven as long as risk sentiment is weak, but the market is also very wary of official intervention and with good cause," said John Hardy, head of currency strategy at Saxo Bank.

Japanese Prime Minister Shinzo Abe said on Monday he has instructed Finance Minister Taro Aso to watch currency markets "ever more closely" and take steps if necessary, four days after Britain's historic vote.

The euro was down 0.8 percent at $1.1016, having hit a three-month low of $1.0912. It was 1.4 percent lower against the yen and nearly 0.5 percent lower against the Swiss franc.

(Additional reporting by Shinichi Saoshiro)

Photograph: Reuters

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Anirban Nag
Source: REUTERS
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